Bitcoin enthusiasm has resurged, with the cryptocurrency hitting a record high on March 5 and maintaining its upward trajectory. In 2024, it has outperformed most other assets, attracting investors. However, along with the renewed interest in bitcoin, misconceptions and uncertainties surrounding the factors influencing its price are also spreading.
Over the past month, the price of bitcoin has surged by nearly 70 percent, a development celebrated in cryptocurrency circles as a return to a familiar boom-and-bust cycle. The phrases “number go up” and “it’s just math” have been playfully adopted by crypto enthusiasts and skeptics alike. These expressions reflect a belief among staunch supporters that the economic framework of Bitcoin, characterized by a fixed supply of 21 million coins and a predetermined release schedule hardcoded into the software, will inevitably drive the price upwards over time. This perspective views scarcity as a countermeasure to the rampant inflation of traditional currencies and the unsustainable debt levels incurred by governments worldwide.
Currently priced at over \(72,000 per coin, bitcoin is anticipated by advocates like Samson Mow, CEO of bitcoin-focused technology firm JAN3, to potentially reach \)1 million in the near future. Mow expressed his views to WIRED in November, emphasizing the fundamental flaws in traditional monetary systems. However, amidst the excitement and optimistic projections, critical questions arise regarding the valuation of cryptocurrency. James Angel, an economist at Georgetown University specializing in financial markets, highlights the challenge of valuing bitcoin due to its unconventional nature. Unlike traditional assets, bitcoin lacks a company backing it, generates no revenue, and is not extensively used for transactions or other purposes. Moreover, it is not issued by any government, making comparisons difficult. Angel asserts that “a limited supply does not equate to infinite value.”
Originating in 2008 following a global financial crisis, bitcoin emerged as a response to dissatisfaction with the traditional financial system and the actions of major banks that led to the crisis. Designed as a form of “electronic cash,” bitcoin aimed to decentralize monetary policy, limiting the control of central banks over money supply and circulation. Satoshi Nakamoto, the mysterious creator of Bitcoin, envisioned a currency free from the manipulation of banks or governments, safeguarding individuals’ savings from devaluation.
The valuation of bitcoin poses a complex challenge, as Silvia Dal Bianco, an economist at University College London, explains. The value of bitcoin hinges on its perceived identity and utility. While bitcoin is not extensively utilized for transactions currently, proponents believe in its potential as a digital alternative to gold—a hedge against inflation and economic uncertainties. However, the oversimplified narrative often propagated on social media reduces bitcoin’s deflationary characteristics to a simplistic notion of scarcity driving up prices, encapsulated in the “number go up” philosophy.
Despite the anticipation surrounding bitcoin halving events, where the rate of new bitcoin issuance is halved approximately every four years, the price surge following these events is more attributed to speculative trends rather than inherent economic principles of the Bitcoin system, according to Angel. The closest semblance to a fundamental valuation metric for bitcoin lies in the cost of producing new coins. Similar to gold mining costs influencing gold prices, the expenses associated with bitcoin mining should theoretically correlate with its market value. However, bitcoin’s design introduces complexities, as mining becomes more resource-intensive with increased competition, leading to fluctuating production costs.
Detached from traditional valuation methods and tangible utility, bitcoin’s price fluctuations predominantly reflect collective beliefs and speculative sentiments. The recent price surge has intensified discussions and attracted more speculators, creating a self-reinforcing cycle that can swiftly reverse course if confidence wanes. The introduction of bitcoin exchange-traded funds (ETFs) in the US in January further fueled the price surge, facilitating broader investor participation in the cryptocurrency market.
As debates continue regarding the economic viability and future trajectory of bitcoin, the influence of evangelism and speculative fervor on its price dynamics remains significant. The fervent promotion of bitcoin as a store of value and future currency by enthusiasts like Mow underscores the marketing aspect intertwined with price appreciation. This evangelistic fervor, driven by the promise of financial gains, shapes perceptions and sustains the momentum behind bitcoin, overshadowing critical discussions on its long-term sustainability and economic implications.